Aren't #1 and #2 the same thing? In other words, isn't a divorce a change in marital status? (Yes, I realize that "getting married" is a change too, just saying that divorce should be covered in #1.)

We had our estate plan done a few years ago and haven't had any of these changes, so we haven't reviewed it for some time. That said, we will want to look over it again in a year or two just to make sure all is as we want it.

How about you? Do you have a will? Do you have other estate planning documents? Do you need to review any of them based on the list above?

December 30, 2010

Working part time on the side is becoming an increasing trend in today’s economy. Without getting into the reasons behind the “why”, I will focus on the “how” part of striking a balance between work, life and your side business or business-es.

If you are already in this situation, you know how difficult it can be to juggle the multiple responsibilities and obligations on your plate. If you are contemplating getting into this situation, I hope this post provides some value in preparing you to handle what’s to come.

Your personal situation and circumstances mostly dictate how much free time you have for a side gig. For example, a single individual likely has more free time compared to someone who is married with children. A senior manager in a public accounting firm likely is busier and spending more hours working than a new associate. Similarly, where you stand in life compared to your neighbor will dictate how much capacity you have to delve into extra-curricular activities.

Assuming that you have the time, how do you maintain a healthy balance given the existing priorities that are constantly competing for your limited time? I hope the following can help:

Passion in your side gig – it is often said that having passion in what you do is the single most critical component of success. Passion however is also a critical component of satisfaction and integration between your personal life and your side business. So while your side gig has to make sense from a financial perspective, pick a subject you are interested in so work doesn’t feel like work.

Pick a side gig to revolve around your life – I’ve said it repeatedly, but always worth reiterating that the American culture has this the other way around. In America, we chase jobs and opportunities. In many other countries, people choose where they will be happiest, typically near family and friends, and then build a business, big or small, around where they are. Starting a side gig gives you the opportunity to shape it exactly the way you want it on your own terms. Make sure the business revolves around your life, not the other way around.

Give your all at work – you might be tempted to work on your side gig at work, after all you are likely more passionate about it than your job. But do not make this mistake. There are significant risks involved and you don’t want to lose your steady pay check, especially if it’s a job you like or don’t mind. Sophisticated information technology tools can detect all kinds of activity on your work computer and network. Besides, it’s just the right thing to do. Only work on your side gig during non-work hours.

Set clear priorities and establish boundaries around them – pre determine the number of hours and specific times that you will be working on your business and stick to this commitment. It is easy to neglect your health and family when you catch the entrepreneurial bug. Be clear on your priorities and dedicate time to each. Because it is your side business, you don’t have to grow it overnight. Take your time and enjoy the journey, and share it with ones nearest and dearest to you.

Set financial limits – similar to neglecting other priorities in life, it is easy to get carried away with spending to grow your side gig. Pre determine what your spending limit is, and share it with your significant other or anyone else who has a vested interest in your finances. Keep an eye on your spend and stay within the limit.

Develop a support system – things may get overwhelming at some point, and even if they don’t, it’s good to have a go to sounding board to voice your ideas, opinions, troubles and frustrations. A strong support system can help you get through challenging times, even if it is just in form of an independent third party advice or opinion.

These tips are not a comprehensive list by any means by which you can achieve better balance in life. However, from personal experience, these tips have helped me maintain a good balance between never ending priorities and obligations that seem to stretch me in different directions on an ongoing basis.

You might be nodding your head right now if you can relate to this. But take comfort in the fact that with the appropriate discipline, it is possible to have a wonderful career, a successful business on the side, and a great life too with loving and caring family and friends around you.

1. Feel free to flout tradition. The traditional rule of thumb was that the groom should plan to spend anywhere from one to three month’s salary on the engagement ring. But as priorities shift, that rule has fallen out of favor. Diamonds and a traditional gold or silver band are no longer de rigueur either.

2. Consider lifestyle. A large diamond solitaire may look impressive in the store, but it may not be practical for daily wear, especially if the wearer is active.

3. Learn the 4 C’s. Since the diamond is usually the most expensive part of the ring (“it’s hundreds of dollars for the band, and thousands of dollars for the diamond,” says Garrett), some couples choose alternate stones or a decorative band instead. But if you’re set on a diamond, you’ll want to familiarize yourself with the 4 C’s, as developed by the Gemological Institute of America (GIA): carat, clarity, color, and cut.

4. Give yourself time. Just as some people have no trouble finding “The One” and others spend most of their lives searching, there’s no prescribed timeline for shopping for an engagement ring. It’s safe to say, though, that you probably won’t find what you’re looking for in a single afternoon.

My comment on these:

1. That whole one to three month's salary thing has always been ridiculous to me. Who made it up anyway, the diamond industry (that would be my guess)? As for a non-diamond stone, if my wife was willing to go for something different when we got married, I would have. But we're sort of traditional anyway and went for the diamond.

2. This is a very good point. A huge diamond can bee unwieldy -- especially on a little hand.

3. Is this really new? These are supposed to be the "new" rules. Seems like the same old stuff here.

4. Is this new too? Did people used to go out in one day and get a ring -- and now they shop around? It's been so long since I've purchased an engagement ring that perhaps I'm out of the loop.

If I was doing it all over again, I'd have a conversation with my wife-to-be and try to decide what we thought was the best option together. Then we'd pick out the ring together. I know, it kills the "surprise" factor, but seems much more reasonable to me. Just call me Practical Peter. ;-)

How about you? For those of you who are married, how did you select your engagement ring -- and would you do it the same way again? And for those of you not yet married, what are your plans for buying an engagement ring?

The following is a guest post by Josh Kaufman, a business teacher and the author of The Personal MBA: Master the Art of Business. He teaches craftsmen, artists, and professionals how to learn the fundamentals of modern business practice without mortgaging their lives. Learn more at PersonalMBA.com.

In my previous post, we discussed why getting an MBA might not be a good decision - particularly if you take on student loans to finance the degree. In this post, we'll examine the alternatives.

The list of successful businesspeople without MBAs is long, and cited often enough to be a cliché. Folks like Steve Jobs, Bill Gates, Jeff Bezos, Sam Walton, and Anita Roddick don't have MBAs, and have done quite well for themselves as CEOs of large companies. And while CEOs consistently grab the headlines, millions of unnamed entrepreneurs and small business owners around the world have figured out how to be successful without obtaining an MBA.

The question is: how?

It's simple, really: these business professionals may not have a credential, but they made it a priority to educate themselves about business - mostly by reading, experimenting, and learning as they went along.

Education is the process of learning something useful - concepts, knowledge, and skills that improve your life in some way. If you want to become a successful person, investments in education can pay massive dividends when it comes to your ability to make things happen in the real world. Aside from luck, education and application are ultimately how successful people become successful.

Believe it or not, colleges aren't really in the education business. Colleges are in the credentialing business - providing a degree, certificate, or other form of verifiable proof you've completed a mostly arbitrary, bureaucratically-defined set of criteria. Satisfy the requirements, pay the tuition, and you get the degree. Any relation between the criteria and real-world usefulness is nice, but a distant concern as far as the school is concerned.

Education and credentialing aren't the same thing. If you go to college, you're ultimately paying for a piece of paper, not an education. Education is about what happens in your head, not in a classroom.

Credentials can be useful because some employers use them as a simple screening mechanism for deciding which applicants to interview. In most cases, it doesn't really matter where the credential is from, as long as you have one.

Corporations use credentials as a way to outsource their HR screening process. By only accepting graduates with certain credentials from certain institutions, the company can save significant time and money screening out poor candidates. (The cynical view is that corporations also benefit from hiring candidates with massive debts - the employee needs the stable salary the company provides more than the company needs their services.)

That's why people say credentials "open doors." If the Goldman Sachs HR department automatically discards resumes that don't feature the letters "MBA", good luck getting an interview if you don't go to business school.

So - if you want to do something that absolutely requires a credential, and you can obtain that credential quickly and inexpensively, then obtaining that credential may help you. If you want to be a surgeon, by all means graduate from medical school - you can't practice if you don't.

Business, however, is distinct from many professional fields in the fact that credentialing and licensure isn't a legal requirement of practice. If you can create something valuable, attract the attention of potential customers, close sales, deliver on your promises, and make more money than you spend, you're in business. If you can give people what they want, you don't need a credential.

That's why getting an MBA is a poor choice if you're interested in entrepreneurship. If a credential "opens doors" you're not interested in opening, you don't really need it.

People like Steve Jobs, Bill Gates, Jeff Bezos, Sam Walton, Anita Roddick, and other successful entrepreneurs became enormously successful because they figured out how to create and deliver things that people desire enough to pay for. That, ladies and gentlemen, is what you need to learn to succeed in business - nothing more, nothing less.

If you have the drive and fortitude to become an entrepreneur, you don't need an MBA - but you still need to learn the essentials of business if you want to do well.

If working for another company is more your speed, all you really need to do is prove to a hiring manager you have Economically Valuable Skills - skills that will help the company create more value, market, sell, deliver value, and/or enhance profitability. If you can't do any of those things, you won't be hired - regardless whether or not you have a credential. Working for smaller companies, where you report directly to the CEO and have significant latitude to make things happen directly, can be huge opportunities that help you build your skills and prove to other employers your work is valuable.

No matter what path you choose, you must learn the essentials of business, people, and systems if you want to do well. Almost everyone (even graduates from MBA programs) gain most of their practical knowledge through experience, over time, and making costly mistakes. Good business education can help make that learning curve much shorter.

Charlie Munger, Warren Buffett's business partner, calls these basic units of education "mental models" - a term worth knowing. The more accurate the mental model, the better decisions you'll be able to make using it. The more foundational the mental model, the more that idea can explain. The more mental models you learn well enough to use, the more opportunities and risks you can perceive, understand, react to, and take advantage of in the real world.

Unfortunately, even the best credentialing programs in the world focus less on mental models than on the credentialing process itself. Checking off topics on a bureaucratic syllabus means very little if those topics aren't essential mental models. If the accreditation process says you must learn the Black–Scholes option pricing formula, learn it you must - even if you never use it, and forget it immediately after the exam.

That's why even graduates from top business schools ultimately use a very small fraction of what they're tested on in the classroom - what they're learning in the classroom has almost nothing to do with the mental models they need to do their jobs. That type of "learning" is a waste of time and energy.

That's why I advocate self-education - learning the essentials of a topic on your own, before seeking credentials. By taking full responsibility for your own education, you can spend more of your time and energy learning foundational mental models that will actually make a difference in practice.

Learning is really about what happens in your head, not in a classroom. The best classrooms can certainly facilitate the process, but your ability to master the concepts that matter will always be your sole responsibility. You can save a lot of time and energy by learning the basics on your own.

This approach to learning is a natural offshoot of the "80/20" principle - you don't need to learn everything there is to know about a topic in order to do well. All you need to learn is the Critical Few - the small percentage of concepts that provide most of the real-world value. Learn the essentials first, and you can go surprisingly far. The more you read, the more you research, and the more you experiment with real projects that have real consequences, the more you'll learn.

My book, The Personal MBA: Master the Art of Business, started as a personal project. My goal was to isolate the most important business-related mental models, so I could use them to do more valuable work. By sharing what I learned in the process, I hope to dramatically decrease the time it takes you to master the essentials of business, so you can spend more time doing work that matters.

This approach to education isn't new by any means: books like Drawing on the Right Side of the Brain have used this approach for quite some time, with remarkable success. Topics like mathematics are taught by focusing on core ideas first, then combining them to explain more complex ideas. My book is, as far as I know, the first time it's been attempted in the field of business. The question of whether or not I've succeeded is ultimately up to you to decide.

Whether or not this approach to education is right for you is a personal decision. The business self-education debate is very similar in many ways to the homeschool debate, and is controversial for the largely the same reasons. Regardless of what you ultimately choose, researching all of your options and making a mindful choice will help you make the best possible decision.

In the end, the decision self-educate or go to school is yours, and yours alone. I hope whatever you choose, you find nothing but success.

Hold on, not so fast. Michigan was listed as one of the ten most troubled states. Then again, that alone didn't make it a top 10 loser for retirement. Must have been the great weather that kept it out of the cellar. Yeah, right.

I'm not sure what we'll do when we retire -- stay here or move. I do know several retirees who have moved on, mostly to warmer weather states with little to no state income tax. Hmmmmmm........now I'm thinking.....

At the end of this post is an Excel spreadsheet that contains the brackets for the 2011 version of Free Money Finance March Money Madness (if you're wondering what I'm talking about, click here.) A few things to note about the competition:

The games will begin on Monday, January 17 and new ones will be posted every Monday, Wednesday, and Friday through the initial round. Each set of games will be up at least a day and a half, but after that, I'll probably cut them off and name a winner. Some may go longer (especially those posted on Fridays), but not much longer than three days.

The winner will be named in a comment left at the bottom of each post. I'll note that this set of games has now concluded and tell which posts won. If you need an example of what this looks like, look at my comment near the end of this post.

The some of the included posts earned automatic bids since I judged them to be the best 10 from 2010's Best of Money Carnival winners. That is why some blogs will have more than one post included -- these 10 do NOT count against the one blog/one post limit (this is one major benefit of winning a weekly Best of Money Carnival competition.)

If your post is in the competition, you are allowed to vote for yourself. Others will do it, you might as well too. But you can only vote once per game, just like everyone else.

If your post is in the competition, you're allowed to ask your readers to vote for you. Again, others will do it, you might as well too. If you feel it's too promotional to ask people to vote for your post, you can simply point them to the competition and ask them to vote for the best post. ;-)

The research found children between 12 and 18 months learned almost nothing from infant-learning DVDs designed to improve vocabulary, even after watching them several times a week for a month. So be smart, baby: do a little research before you buy something dumb.

MoneyTalksNews goes on to say that playing with toys that involve multiple senses, listening to music, and talking to small children are better ways of developing them mentally.

We never used these DVDs -- I'm not sure they were out when our kids were young -- but they sound like a WOM to me (FYI, WOM = waste of money.) Anyone have any experiences with them -- pro or con? Are they really worth the cost or not?

The following is a guest post by Josh Kaufman, a business teacher and the author of The Personal MBA: Master the Art of Business. He teaches craftsmen, artists, and professionals how to learn the fundamentals of modern business practice without mortgaging their lives. Learn more at PersonalMBA.com.

Over the past few weeks, FMF has done a wonderful job exploring the value of MBA programs, as well as college degrees in general. If you missed them, here are the posts:

In my book, The Personal MBA: Master the Art of Business, I make the case that you don't have to go to business school to learn practical business skills and do well in the working world. In fact, skipping the MBA may actually help you be more successful in the long run.

That's a position that makes many people uncomfortable, and has sparked quite a bit of controversy. The question is: why?

Because I've publicly advocated skipping business school, I've been standing squarely in the middle of this firestorm for six years. To be honest, I've always wondered why people get so worked up. From my point of view, it's pretty straightforward: do the math and consider the risks - ALL of the risks.

Business schools are, on average, over ten times more expensive than were twenty years ago - after you account for inflation. (Source) Most students, unless they're already wealthy, finance tuition, fees, and living expenses via debt. These loans feature 5-10% interest rates and are non-dischargeable in the US by law, even in the case of bankruptcy.

By paying for business school with loans, you're taking a huge risk: you're borrowing a ton of money all at once that must be repaid, no matter what happens in the future.

If all goes well, you'll be okay: assuming you land a high paying job you like, steadily increase your pay over time, manage your finances wisely, and nothing unexpected occurs, getting an MBA may prove to have been a decent investment.

If something unexpected happens, however, your life may not turn out so well.

Accurate risk assessment for any investment requires good Scenario Planning, which includes a Doomsday Scenario. Before you sign on the dotted line, it always pays to consider what could potentially go wrong.

In the case of business school, the list is quite long:

You have trouble finding a job immediately after you graduate, or the search process takes longer than you anticipate.

You're laid off, your department is downsized, or your company folds in a down market, and you're out of work for a while.

You have an unexpected medical emergency, with accompanying unexpected medical bills.

Your new job makes you miserable, and you decide to quit and do something else that pays less in the short term.

You decide to start your own company, and need funding to cover your overhead, including rent and food, without an immediate income.

Financially, all of these situations boil down to one major risk: a short-term, unforeseen cash crunch that limits your available funds. If you're unencumbered with debt, it's not as big of a deal - you have the freedom to cut expenses with relatively few long-term repercussions. Also, if you aren't constantly paying debt service, it's far easier to establish emergency funds that can help you handle unexpected events more easily.

If you're encumbered with student loans that have minimum payments in the thousands of dollars, that short-term cash crunch becomes a huge deal. Every single time you miss a payment, defer a payment, apply for abatement or forbearance, or consolidate your loans, you automatically rack up massive fees and interest penalties on top of your already considerable loan balance. Missing payments can also jeopardize professional licenses, which may be legally required to do your job.

As a result, your outstanding debt (and future monthly payments) can spiral out of control overnight, with no recourse whatsoever. Modern student loans are not structured in favor of the borrower in any sense. If you're looking for the fastest way to ruin your finances in perpetuity, missing a payment on a student loan easily takes the cake. (See The Student Loan Scheme: Gateway Drug to Debt Slavery for details.)

Business school is now expensive enough that the direct costs alone are considerable, but the risks you assume with student loans are truly massive. This is not a theoretical exercise: the above scenarios play out every single day, and have a higher probability than you might originally think. It also applies if you have children, and you intend to co-sign their student loans.

Take a few minutes to browse around on StudentLoanJustice.org to survey the damage, and remember the Attribution Error - these people aren't uniformly boneheaded idiots who are getting their just deserts. Circumstances matter more than we like to admit, and risks aren't risks if they never come to pass.

If MBA programs had a proven track record of successful student outcomes, that would certainly help mitigate the cost and the risk. Unfortunately, research indicates that business schools do pretty much nothing when analyzed on every measure of professional success: job attainment, salary, lifetime earnings, promotion, job satisfaction, etc. (For details, see: "The End of Business Schools? Less Success Than Meets the Eye" by Jeffrey Pfeffer and Christina Fong, both business school professors.)

If you can mitigate the cost and risk by (1) paying less, and (2) minimizing student loans as much as possible, the situation improves considerably. FMF writes about how he made millions by investing $5,000 in undergrad and graduate school. I agree with his conclusion - if you can get a credential that opens useful doors for $5,000 total, it's very likely your investment will pay off, and the risks are minimal. In FMF's case, investing a small amount of money in college credentials helped him land a job at a big-name company, which payed off in spades for the rest of his career.

Here's my story: I landed a full-ride undergraduate scholarship from a state school, so I didn't pay anything for my bachelors degree. Part of my undergraduate program was co-operative education (essentially an extended paid internship), which landed me a job at the very same big-name company, which turned into a full-time management-track job when I graduated. That was a good investment, and the risks were minimal.

Here's the twist: most of the people I worked with on a daily basis at big-name company were recent graduates of top 15 business schools, with student loans to match. It was easy to put myself in their shoes. After a while in my shiny new job, I realized I was miserable doing this type of work, even though the job was prestigious and paid well.

The experience of taking a job I thought I'd enjoy, only to discover it made me miserable, was a huge wakeup call. After a few years, I left the company to start my own education/publishing company, which I bootstrapped. The lean times getting the business off the ground would have been impossible to manage if I was also responsible for paying a few thousand a month in student loans. Today, I have no debts, own my own business free and clear, and I'm doing work I love.

I'm very fortunate - student loans would've made it extremely difficult to do what I'm doing now, and my life would be immeasurably poorer for it. I dodged a bullet - a big one. If I'd have gone to business school, I'd be stuck doing work I don't enjoy just to pay the loans, which I'd likely carry for decades. I feel the equivalent of surviving a near miss with a semi truck - the reason I warn potential students to look before they leap.

Freedom and flexibility are enormously valuable - and enormously underrated. You give up both when you borrow money, particularly when student loans are involved. In many cases, having the freedom and flexibility to take advantage of unexpected opportunities may be even more valuable than trading those benefits for a credential.

In general, people are uncomfortable questioning the value of credentialing because it goes against many common and deeply-held beliefs about the intrinsic value of schooling, social status, prestige, and feeling clear about the world and their place in it. Credentials are also a common refuge for people in transition: in most circles, you're not "unemployed" if you're paying tuition, which makes credentialing a comfortable option. Compared to these values, the learning aspect of credentialing is a distant concern - even though the learning is far more important.

Aside from a few significant differences of opinion of how business schools should go about teaching business skills, I primarily counsel against taking on massive debts to finance any credential. Borrowing money to finance a credential puts you in a very shaky financial position - one that, regardless of the doors that credential opens, could easily make your life more difficult than it really needs to be. The risks must be considered along with the potential rewards.

That's not to say I'm against education - quite the contrary. I'm a huge advocate of getting the very best education you possibly can. Fortunately, education and credentialing aren't at all the same thing. More on that tomorrow.

In the meantime, where do you stand on credentialing? If you can't pay for a credential in cash, do you think obtaining a degree is worth the risk and loss of flexibility?

December 28, 2010

Those of you who have been reading FMF regularly know that I've had a shopping list of things I've wanted to buy the past year and a half or so. Every so often I give you all an update on the list (here's the last one). Since we're approaching the end of the year, I thought it would be a good time to let you know how I'm doing. Here goes:

Vacation -- We did travel to Chicago in September for what turned out to be a great three-day trip. Next on the agenda: Hawaii towards the end of 2011 (at least that is my thinking as of now).

Laptop -- Got a great one at Costco. The size I wanted, faster than I wanted, more hard drive than I wanted, extra warranty (Costco added an extra year for free), at a killer price. It was through an email special and I haven't seen anything close to it since (I got it in October) at Costco or anywhere else.

Furniture -- This one is still dragging. Have I mentioned how much I hate furniture shopping?

Glass replaced in two windows -- Done (and the windows were re-stained too.) Now looking at replacing the glass in a third window (much cheaper than buying a whole new window).

That's it. Believe it or not, we got everything else on our list completed (landscaping, new front door, lawn mower, television, snowblower, furnace.) It's been a long haul but then again, it has been 18 months since I made the list. ;-)

Here are the reasons he gives for why you shouldn't pay off your mortgage:

You need the liquidity.

You could probably do better investing the money elsewhere.

You expect inflation.

You expect housing to rebound.

Then he tells why he paid off his mortgage anyway:

The logical explanation is that I had enough risk in my portfolio, and as for the low-risk portion of my money, it made no sense to borrow at 3.0% after taxes and invest it at 2.2% in, say, Treasuries. That would be acting like a very dumb hedge fund.

But there’s a less rational reason too. Like a lot of post-crisis Americans, I’ve had it with debt. I don’t want to be beholden to a bank and in an uncertain world I’d rather not have the certain obligation of a mortgage payment every month.

I asked Meir Statman, a behavioral finance professor at Santa Clara University about this caution, expecting a lecture about “availability bias,” or the exaggerated fear of a bad event simply because it is fresh in memory. Instead, I was relieved to hear Statman admit that he’d paid off his mortgage too. “Maybe you could earn a higher return by arbitraging the difference between your mortgage and the stock market,” he said. “But you have to ask yourself what your money is really for,” he said. “Personally, it gives me satisfaction to know that I own the four walls around me. Satisfaction and peace of mind are a kind of return, too.”

As you might imagine, I have a few things to say about the thoughts above. Here goes:

As far as needing the liquidity, if your gap is large enough, you can have plenty of cash and pay off your mortgage as well. I was able to manage both.

As for investing the money elsewhere and getting a better return, maybe you will do better, maybe you won't. This last year you would have done much better by having the money in the market. The couple years before that -- not so much. And, of course, paying off debt is a guaranteed return. Investing is not.

Do you expect inflation? Or deflation? I don't know what to expect these days when it comes to our economy.

As for a housing rebound, this sounds like the best bet to me -- if you have five to seven years to wait.

And for the "had it with debt" argument, this is why I paid off my mortgage almost 14 years ago. I list "being deep in debt" as #3 on my list of the 10 worst money moves you can make, but for me having ANY debt was a bad money move. I wanted to get rid of it all asap -- and my house was the last to go (I didn't have much before that, though). So for the last 14 years, I've had satisfaction, peace of mind, and no mortgage payment. Yes, it's been sweet!

If you're in debt and think you can't get out -- you're wrong. Here are seven steps to get out of debt. Apply them over a long period of time and you WILL get out of debt -- including mortgage debt (if you work at it long and hard enough.)

1. Nobody Knows What You Need More Than You. How many times have you had to fake liking a gift? It's painful, but we do it. That piece-of-junk kitchen appliance or ugly sweater ends up never getting used. Then you have to live with the guilt knowing that your loved one spent $50 on it for you, and you never used it. When they come over, you leave it out in the open so it appears that you have been using it after all. Kind of sad. You have a chance to end that painful cycle.

2. Nobody Knows What Your Loved Ones Need More Than Them. This is #1 flipped around. Why spend all of the time running around the herd looking for something that you're not even sure someone will like? You're wasting your time and your money, and when your loved one opens up that gift, you know they are faking their joy. Again: painful.

Anyone else out there get frustrated this past month trying to find a gift for someone who "has everything" or "doesn't want anything"? Me too. So you end up buying something that's probably not a great gift -- but you hope that it's at least "good". Ugh.

So what do you do about it? Here are some suggestions:

1. Ask for lists. We had our kids write out lists near the end of November detailing what they wanted for Christmas. They understood that these were guides for us and that we weren't guaranteeing they'd get only things from the list. They also understood that they wouldn't get everything on the list (of course.) We even told them that we would be spending the same amount on each of them and asked if they preferred a smaller number of gifts with higher than average value each or a large number of gifts with smaller than average value each. My son took the former and my daughter the latter.

2. Shop for others. This year my wife and I did the shopping for our kids' gifts for both sets of grandparents. They gave us a budget, we bought the gifts, we wrapped the gifts, and we delivered the gifts. They saved the time and effort (plus postage) and were sure the kids got what they wanted (because, again, we had lists from our kids.) ;-)

3. Buy your own gifts. I know I am a difficult person to buy for. I have almost everything I need, I don't want much, and when I do want something I'm very picky about it. So it's often a losing proposition to buy me something. That's why many of my gifts (from my wife to me) were purchased by me. I got what I wanted, bought on sale (or used coupons), and saved her a ton of effort. Sure, I don't get "surprised" when I unwrap the gifts (yes, we wrap them), but at my age surprises are over-rated.

4. Use gift cards. For people who are hard to buy for (like my dad -- I know he likes Menard's, though), those you don't know anything about (postman, newspaper lady, etc.), and/or those who are far away (saves postage and having to wrap a gift/box), gift cards are often the perfect solution (assuming you know the sorts of places they like to shop.) They seem to become a bigger part of our Christmas budget every year.

5. Give money. Yes, cash can be crass, but cash is also king. And if it's too "boring" or "tacky" to give cash or a check, you can be creative by giving gold dollar coins instead. These are always a hit (we put them in a creative package that's also a gift: a wooden "treasure box" or small piggy bank -- both of which can be purchased on sale at Hobby Lobby stores many times throughout the year -- make these gifts extra special and fun.)

How about you? What do you do to make sure those you give gifts to get what they want/need?

December 27, 2010

The following is a guest post by Michael Robbins from Debt Consolidation. I've added some of my thoughts at the end.

Yes, paying off your debt is the simplest and surest way to improve your credit. But, believe it or not, this is only 15 percent of what goes into your credit score. To have the best effect on your score, you need to improve as many areas as possible.

Step 1: Pay Off Your Lowest Balance First

If you owe a small balance on a credit card, or only have a few hundred dollars to go on a medical debt, then finish it off and close it out. This will have a positive effect on three areas of your credit score: amount of debt, total lines of credit, and debt to income ratio. This will also help you build momentum in your debt elimination plan, and free up more money in your budget.

Step 2: Improve Your Debt-to-Income Ratio

The higher your income in relation to your debt, the better your credit score. Either find a way to bring in more income, or sell something to pay off your debt. Ideally, do both.

Step 3: Eliminate High Interest Debt

Develop a plan to pay off your highest interest debt as soon as possible. Debt consolidation is a great way to improve your score by doing precisely this.

Step 4: Avoid Opening a New Line of Credit

Unless it is absolutely necessary, don’t take out any new loans or credit cards. The more credit accounts you have open, the more lenders view you as a risk. On the other hand, paying off a debt will close a line of credit and improve your score.

Step 5: Check Your Progress Often

Monitoring your progress will help you work towards a goal, and make better decisions. There are a lot of free or low-cost services online that enable you to check all three-credit scores at any time. Keep in mind that you are entitled by the government to a free credit report from each service once a year. Reviewing your credit report will also give you the opportunity to make sure there are no mistakes on your report which can cause significant damage to your score. You'll also be able to ensure that the debts you pay off are removed in a timely manner.

In case you are unaware, this is how lenders generally tend to view your score:

Excellent credit = 720 and above

Good credit = 660 to 719

Fair credit = 620 to 659

Poor/bad credit = 619 and below

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Here's my take on these:

1. There's the whole "lowest balance" versus "highest interest" debate, of course, over which way to pay off debt is better. I used to be in the "highest interest" camp because that argument makes the most sense logically. However, people in deep debt aren't logical and what seems to work with them is quick wins. That's why I now recommend the "lowest balance" strategy when I tell people how to get out of debt.

3. First of all, this seems to be a contradiction to #1. I think what he's saying is that if there's one very high interest loan (like a credit card), try to get rid of it sometime early in the process (not necessarily first.) Second, I've seen debt consolidation work and I've seen it not work. If the people who take out the loan have changed their over-spending ways, debt consolidation can be a good tool to get back on the road to financial recovery. If they haven't changed their ways, debt consolidation allows them to temporarily postpone their impending financial doom and keep their current habits for some time. But eventually they have to pay the piper, and it's even worse if they've spent additional amounts.

When you travel is undoubtedly the biggest factor influencing how much you'll pay. Off-season travel is usually when you'll find the best bargains (and smallest crowds.) But if you're not able to travel off-season, even a day or two difference can save you mucho dinero on airfares, hotels, rental cars, and travel packages.

Now of course many people can't do this because they have work commitments and/or kids in school. This is one advantage of homeschooling your kids (as we do). They can go anytime without "missing" school. We simply double up assignments in preparation for vacations. In addition, we generally start the school year 10 days before the school system and we don't take as many breaks (for instance, the day after Thanksgiving was a school day for us and we don't take a two-week break at Christmas -- just one week.) Anyway, this gives us a lot of flexibility to cash in on some great travel deals. For instance:

We went to Chicago in September. We went on days where the museums were free. I used hotel points to pay for one day of our stay, the rest was discounted due to the days we were there. And the kids didn't miss school -- they got an extra dose as we visited the Shedd Aquarium and the Museum of Science and Industry (my favorite!).

When we went to Disney (no school benefit this trip, but here's what we did), we saved a ton on hotels (we got a three-bedroom condo that was fabulous for something like $80 per night) and airfare by going when we did (in September.) We also avoided the notoriously large crowds at Disney. We usually walked onto all the rides (no waiting!). But on one ride we had to wait 15 minutes or so. The kids were complaining, "Why's it taking so long!!!" Ha! If they only knew!!!!

We're tentatively planning a trip to Hawaii next fall. We were thinking of going in January, February, or March, but we read a book saying that the best time to go to Hawaii was when the weather was at its best there (though it's always "good") which was July through October. So we're now thinking of going in October, which happens to be a non-peak month. That said, we may push it back a bit since October is still nice here and we'd like to go when it's cold. So possibly early December will strike a balance for us.

How about you? Anyone else out there saved a ton of money by traveling at a non-peak time?

“There’s nothing to eat,” I murmured to myself as I stood staring endlessly into my kitchen pantry. You know the position—arms braced on each side of the door, slightly leaning back, gazing deeper and deeper into the dark recesses desperately hoping for something to appeal to my appetite. No luck. “Ehhh, there is nothing to eat,” I muttered under my breath hoping perhaps the fridge would host greater luck. Then God spoke to me. As I was walking to the fridge, He urged me to look in the pantry again. The items listed below are the contents of my pantry at that moment of despair:

It hit me like a ton of bricks: “Is this what I have come to call an empty pantry?” The realization left me humbled. Three-fourths of the world’s population would be ecstatic to see such abundance. I sheepishly found something to eat and with a little bit of embarrassment gave thanks for my food. Similar arguments could be made for those of us who stand in our over-stuffed, walk-in closets claiming we have “nothing to wear,” or those of us who have heard our children say they have “nothing to play with”! These are perfect examples of the paradox of prosperity.

We go about our lives believing that if we had this or that, then we would be content. In this scenario, contentment more or less is having what you want (whatever that may be at the time). It seems logical, but the Bible and experience have taught us otherwise. Contrary to our innate instincts, the evidence clearly indicates that contentment is not the natural result of prosperity. Ironically, accumulation often does more to drive our discontent. The confusing and alluring nature of prosperity often clouds our understanding of true contentment.

We must look at the unique challenges of prosperity to walk wisely. Paul said: “I have learned to be content in whatever circumstances I am. I know how to get along with humble means, and I also know how to live in prosperity.” (Phil. 4:11-12) Paul explained that he had learned how to be content in poverty and prosperity. This dichotomy is enlightening. It eliminates the prospect of prosperity as the pathway to contentment, yet it clearly states that contentment can be found amidst affluence. We, like Paul, will only understand how to live in prosperity with contentment by learning.

Affluence = Amnesia?

The first danger prosperity poses in our pursuit of contentment is what I like to call “affluence-induced amnesia”. We have to recognize this reality to walk wisely through prosperity. The Bible makes a clear connection between money and memory loss.

“Feed me with the food that is my portion, that I not be full and deny You and say, ‘Who is the LORD?” (Prov. 30:8-9)

“Beware that you do not forget the LORD your God…otherwise, when you have eaten and are satisfied, and have built good houses and lived in them, and when your herds and your flocks multiply, and your silver and gold multiply, and all that you have multiplies, then your heart will become proud and you will forget the LORD your God.” (Deu. 8:11-14)

“As they had their pasture, they became satisfied, and being satisfied, their heart became proud; therefore they forgot Me.” (Hos. 13:6)

We have to recognize that the Bible clearly states that it is the tendency of humanity to walk through prosperity with a sense of forgetfulness. To our shame—as soon as the going gets good, we forget the Lord. This is a sad condition, but it is something with which we can all identify. When facing difficulty we live in close communion with our Maker, but when life is going well we are quick to turn our attention off of Him.

Why does this happen? The answer is given in the passages above—our heart becomes proud. In our poverty, humility stays close by our side. However, when we begin to become successful, we are susceptible to the sneaky suspicion that we are the reason for our success. The first step of living in prosperity contently is remembrance: “But you shall remember the LORD your God, for it is He who is giving you power to make wealth.” (Deu. 8:18) As we become more intentional to maintain a sense of remembrance, thankfulness, and awareness in our affluence, we begin to close the door on the awful sin of forgetfulness.

This concludes part 1 on this topic. Come back next week to read part 2.

December 24, 2010

I don't care how brilliant an investor you are. If you're not putting away a decent amount of money on a regular basis throughout your career, your chances of accumulating a million bucks are lower than LeBron's chances of getting elected mayor of Cleveland.

My point is to show that the more you save, the less you have to count on lofty returns. It's important to keep that in mind because ultimately we have more control over how much we save than the investment returns we earn.

That said, you don't want to invest so conservatively that you end up having to save so much that you live like an ascetic. You should be willing to take prudent risks, especially when you're young, in hopes of earning a higher rate of return and making your savings burden manageable. But you don't want to invest so aggressively that you're left in the lurch late in life if you don't get the rosy investment performance you'd hoped for.

Now for those of you who are chomping at the bit to say "$1 million is not enough", CNN Money covers that issue too:

I'm not sure how you arrived at $1 million as your goal. Maybe it's just a nice big round number. Remember, though, having a million bucks 37 years from now isn't like having that sum today. In fact, assuming a modest 2.5% inflation rate, $1 million in 2047 would be the equivalent of having about $400,000 now. Or, viewed another way, you would need about $2.5 million in 2047 to have the purchasing power of $1 million today.

Finally, rather than shooting for a big lump sum, I think you're better off thinking about how much income you'll eventually have to replace to maintain your standard of living in retirement, and then figuring out what combination of saving and investing, along with other resources like Social Security, gives you a reasonable shot at hitting your goal.

Let's start off with a reminder: FMF is on Facebook. Every weekday I post a couple pieces that usually aren't on FMF. It's a great way to connect and get some extra money advice/news if you're on Facebook quite often.

December 23, 2010

Most investors are not aware of a critical division of professionals in the world of financial services. This distinction lies between fee-only fiduciaries who are free to act in your best interests and commission-based agents and brokers who are required to act in the best interest of the companies that employ them. Even when people have some inkling about the differences, several important misconceptions continue about both the nature of the problem and an adequate solution.

Fiduciaries are bound by a code of ethics. They take oaths and their conduct is based on applying ethical principles. The Certified Financial Planner (CFP) Board of Standards has a published code of ethics that includes seven principles including integrity and fairness. It states, "Integrity demands honesty and candor which must not be subordinated to personal gain and advantage." And "Fairness is treating others in the same fashion that you would want to be treated."

The National Association of Personal Financial Advisors (NAPFA) offers a similar guideline in their fiduciary oath. Advisors promise to "exercise his/her best efforts to act in good faith and in the best interests of the client." These ethical guidelines imply standards of conduct far above what may be legal. They demand what is right. They require the highest obligation of care, good faith, trust and candor.

In contrast, the nonfiduciary world is based on rules rather than on principles and ethics. If an agent has followed the correct procedures, has the paperwork in order and has client signatures on the correct disclaimer forms, no rules have been broken. The behavior can be called unethical, but it is not illegal. Thus additional rules do not necessarily translate into exemplary conduct.

This is one reason why investment advisors objected to a proposal to give the Financial Industry Regulatory Authority (FINRA) oversight of fiduciary advisors. FINRA governs nonfiduciaries such as agents and brokers by means of rule-based conduct. Such an approach is diametrically opposed to being a fiduciary.

NAPFA strongly advocates a fiduciary standard. As part of the oath that NAPFA advisors sign, they pledge they will "not receive a fee or other compensation from another party based on the referral of a client or the client's business."

NAPFA also promoted the idea of a "fee-only" advisor. Their ad campaigns were largely successful at raising public awareness about the difference between advisors who are fee only and those whose compensation is based on commissions. But as if purposefully to confuse consumers, many agents and brokers introduced and started using the category "fee based," which means charging a fee as well as continuing to collect commissions.

The distinction should be easy to understand. You would object strongly if you had to ask your doctor to act in your best interests. You would never think physicians would hesitate to sign the Hippocratic Oath. Neither would you consult a pharmaceutical salesperson instead of your doctor. But the rules-based world of most financial services is like relying on a printout of a drug's potential side effects instead of on a medical degree and the responsibility to treat patients ethically.

Fee-only fiduciaries act as agents for investors. They have permission to manage your investments and make decisions in your best interests. They are held to the highest standard of fiduciary care.

In contrast, an agent or broker is an employee. They work for the mutual fund company or the life insurance company or the brokerage firm and are empowered to act only on behalf of the company they represent. So they are not allowed to make decisions without your consent. They can suggest services and products for you to purchase, but they must have your explicit permission to complete the sale. They are held to a lower standard called "suitability." They are permitted to sell you any product that is generally suitable for your class of investors.

According to FINRA, suitability means the agent or broker only must have "reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer." The more superficial the agent or broker's knowledge of the client, the better this works. The only items mentioned in FINRA's rules are the customer's financial status, tax status and investment objectives.

I've never seen a case of unsuitability or know what an unsuitable investment would look like. Selling 30-year bonds to a 90-year-old might be unsuitable. But age is not part of the information an agent or broker is supposed to elicit from a client.

The claim in any dispute will be that the salesperson explained everything and the client chose to purchase the product. All the disclosures are stated in the sales document you sign, so you have no excuse. You should have read the document. It's your mistake.

Salespeople are trained to get acquainted with their clients to make sales. They ask questions that begin, "Would you be willing to buy if . . ." and "Which of these choices would you prefer . . ." They are supposed to stop asking questions after the customer has agreed. Their lack of familiarity with a client's needs often results in substandard care.

The differences between these two worlds are seen most clearly in the decision-making process. Fiduciaries can't simply put your money into good investments. First they must understand as much as they can about you and your goals. They are required to have an undivided loyalty to help you meet those goals. Taking the time to understand your goals is simply part of their ethos.

Next, they have to strategize how to best meet those goals. They must be analytical and purposeful. They need to clearly articulate an investment strategy, which should include writing a customized investment policy statement for each client before investing. It means practicing comprehensive wealth management. It means striving to be proactive in areas of wealth management for which there will never be products and commissions.

One of the many questions we pose to potential clients is if they have made any investment mistakes in the past. A sad but common response is that they believed a friend, family member or fellow parishioner had their best interests at heart. One way of explaining the difference between a fiduciary and an agent or broker is that you do not have a legal right to trust that an agent or broker is acting in your best interests. They have no such legal responsibility. It really is your mistake.

Here are three questions you should ask any prospective financial advisor: Do you have a legal obligation to act in my best interests? Do you receive any compensation other than the fee I pay you? Do you offer comprehensive wealth management?

Don't accept anything less than a fiduciary standard of care. Your family's finances and welfare may depend on the real differences between what is in your best interests and what is just potentially suitable. You deserve better than satisfactory compliance to the rules. You deserve a firm that offers proactive comprehensive wealth management.

Don Trone, founder and executive director of the Foundation for Fiduciary Studies, describes the difference this way: "A fiduciary relationship requires a consultative, rather than sales, approach to working with the client. The question moves from, 'Is this a good investment?' to 'Is this a good investment for me (the client)?' Such a relationship, by necessity, has to be based on a much deeper understanding of the goals and objectives of the client."

Heed this important distinction between advisers who earn their living from the commissions of products and services they sell and those whose only payment comes from the client. One owes loyalty solely to serving the client. The other's interests are divided at best. NAPFA has promoted this distinction with their slogan "Truly Comprehensive, Strictly Fee-Only" and the "Fee Only" logo. Visit www.napfa.org to find an advisor in your area.

The following is a guest post by Dan Wesley at Credit Loan. After Dan's thoughts, I've detailed where I agree and disagree with him.

The Credit Card Act made it easier to see what kinds of fees your credit card company is charging, and that’s a good thing. But with the average American household having $15,788 in credit card debt, better notification requirements still don’t make a credit card bill worth looking forward to getting when the mail arrives.

While we recommend having no debt, that’s not realistic for many people. If managed well, some debt is OK. If it’s an investment in your future, it’s good debt. Here are five times we think debt is acceptable:

1. Home loan

Good debt includes anything you need but don’t have the money to pay for it upfront, including liquidating investments to pay for it. Long-term debt, such as a bank loan to buy a home, is one of the most obvious ways that debt can be a good way to pay for something that you can’t afford immediately. Who has $300,000 in cash sitting around?

A large down-payment is a good idea to keep your monthly loan payments down. Mortgages usually have lower interest rates than other debt, so you don’t want to put all of your cash reserves into a down payment.

There are also tax advantages to owning a home. The federal home buyer credit has expired, but mortgage interest, property taxes and other expenses are deductible from taxes for homeowners.

2. College

Borrowing from a 401(k) retirement plan or taking out a loan on your home is a bad idea to pay for a child’s college education. Your children have many more years of earning potential than you do, and giving up part of your retirement fund or possibly losing your house if you default on a college loan is no way to go into more debt.

But your kids can take out government-backed college loans at low rates, and payments aren’t due until after graduation. Of course a better way is for them to work and save their money to pay for college so they won’t have to go into debt, but that’s another tale.

3. Auto

Like a home loan, a car is something not many people can afford to pay cash for and buy outright. Putting down as much money as you can afford is a good place to start. The goal should be to drive the car as long as you can after the loan payments have stopped.

Just make sure to shop around for the best interest rate on a car loan -- your bank and credit union might be able to beat a car dealer’s loan rate. Don’t be fooled by a low monthly price; be sure to look at the overall cost of the car when the loan is paid off.

4. Emergencies

If you pay your credit card bill off every month and don’t use it much, an emergency is a good time to use a credit card. Just try to pay it off before the next billing period. Things happen in life -- a car accident, hospital visit, car breakdown, broken tooth -- and not having the cash in hand can lead to more hardships if you don’t get the problem fixed soon. Not having a car for awhile could lead to losing your job if you depend on your car for work.

Granted, having an emergency cash fund for such instances is ideal, and is something you should build in preparation for such events. But even with money in the bank, a credit card may be the fastest and easiest way to make an emergency payment. Just don’t let that debt stay on your balance sheet for long. An emergency fund will be a lot easier to fund than paying off a credit card bill.

5. Growing a business

Notice that we didn’t say “starting a business.” If that’s what you want to do, talk it over with your banker, since starting a business can be a risky proposition. Many businesses can be started cheaply -- $1,000 or less -- with a website to gauge interest.

Once your business is going and successfully making money, then it might be time to take out a loan to expand. Businesses can hit plateaus and can’t grow without more facilities or ways to make a widget, and a loan can jumpstart things.

4. An emergency fund should cover all but the most severe emergencies. However I'm ok with using a credit card for an emergency -- as long as it's paid off before any interest accrues.

5. I'm not sure about the "growing a business" suggestion. If I was fairly confident of a good return, then I might borrow a modest amount -- as long as I thought I could pay it off quickly. If it was risky and there was no way I could pay it off in a reasonable amount of time, then I wouldn't borrow.

How about you? What's your take on these five times when it "makes sense" to borrow?

1. Analyze the job post's wording. An easy way to make sure your resume gets you in the door for an interview is to echo the language in the job post.

2. Weed out fibs.

3. Get rid of the "objective statement."

4. Get rid of redundancies.

5. Cut unnecessary resume "stories."

6. Look for ways to use exciting language.

7. Turn your resume upside-down.

8. Write a draft in a different format.

Here's my take on these suggestions:

1. Yes, the wording on your resume needs to mirror the main points in the job posting. That said, I don't think you have to use the exact words -- as they suggest.

2. Of course. NEVER lie on a resume or in an interview. There's no room for it and your integrity is worth far more than getting a specific job.

3. I never use an objective statement anyway. Never have. Personally, I think they are useless and most of them are so fluffy that they don't say anything. And they take up valuable space as well -- space that could be used to sell yourself to the employer and get you a job!!!!

4. Of course. Is this really a "creative" way to improve your resume?

5. I think they mean "be brief and quick to the point", right? If so, I agree. You want to get as many accomplishments as possible on your resume, so give them "just the facts" for each one and then move on to the next.

6. I prefer "action" words to start off each accomplishment bulletpoint -- words like "led", "developed", "created", etc. To me, this shows that someone is a person of action, someone who gets things done. And how can you be more exciting than that? ;-)

7. This is a stupid idea. I don't know why they listed it.

8. Another stupid idea. The more a resume veers from the normal, standard format (jobs listed in reverse chronological order), the worse it is IMO. Their suggestion of "writing a letter" resume is laughable.

In all, I think there are only four good suggestions here (#1, #3, #5, and #6 are good, #2 and #4 are common sense, and #7 and #8 are worthless) and IMO they certainly aren't that "creative." They should have gone with "Four Ways to Improve Your Resume" and left it at that.

From there, the focus remains on continuing to grow the family's income while keeping expenses low.

15 years later it seems like it's worked out pretty well.

Let's face it, the basics for becoming wealthy are fairly set and you need to follow them whether it's with one income or two, right? It's just that focusing on growing your income is especially important in the case where your family is relying on it completely for their support and well-being.

1. This is a key step in the process. If you buy what you can afford or (worst of all) more than you can afford, you'll probably never pay off your home early. To see what we've done, check out How to Become Wealthy and my comment #6.

2. Moving frequently is expensive (unless you have a company paying for it -- I've never moved without my employer covering all of the expenses) and the less you do of it the more you'll save. FYI -- we've lived in our current home for 11 years now (we did look at moving a couple years ago, but decided against it for various reasons) and plan to live there for at least several more years (probably at least until our kids are in college.)

3. Of course. This is another key step in the process.

4. Same as #3 in my book.

5. Not needed -- you can do it yourself if you have discipline.

6. Again, of course. You want to refinance to make yourself BETTER off financially, not worse off.

7. You must be disciplined over a long period of time (several years) to make this work. If you are not, you will not pay off your mortgage early.

As I do every December, I have been enjoying rereading "A Christmas Carol" by Charles Dickens. This year I've been thinking about Scrooge's interaction with the two portly gentlemen who stop by to collect for the poor. These entrepreneurs represent one of my favorite financial personalities.

In his book "Why Smart People Do Stupid Things with Money," Bert Whitehead describes different financial personalities. He depicts an "entrepreneur" as someone who tends toward greed rather than fear but is balanced between a propensity to save or spend.

Whitehead maps financial personality on two different scales. The first measures people's tendency toward greed or fear. As entrepreneurs, the two portly gentlemen are motivated by greed (high risk acceptance). Ebenezer Scrooge shares this same inclination. The two men see opportunities and the risk excites them. Even soliciting funds for the poor is an integral part of their entrepreneurial spirit.

When the two portly gentlemen stop by Scrooge's office soliciting charitable donations, they discover his partner Marley has been dead for seven years. One comments, "We have no doubt that Marley's liberality is well represented by his surviving partner." The narrative continues, "It certainly was; for they had been two kindred spirits."

Liberality toward others cannot come from someone motivated by fear. Distrust drives out emotions like kindness and compassion. Later in the story, Scrooge confirms this condition in Marley as he looks through his ghostly form and remembers ironically that it was said of Marley he had no bowels. Marley had no empathy for others because he was overly anxious for himself.

When fearful misers like Marley move from savings to spending, they move first to a bon vivant and then to a shopaholic personality. Their fear motivates them to spend more but only on themselves.

Scrooge, in contrast, is more of a risk taker. Thus as he shifts toward spending some of the wealth he has accumulated, he moves squarely into the entrepreneurial financial personality shared by the two portly gentlemen.

Whitehead's second scale measures an individual's tendency to save or spend. Here the two portly gentlemen are balanced between thrift and spendthrift, whereas Scrooge is a practiced saver. A risk taker who is also profligate would be considered a gambler personality. These two gentlemen are balanced between these two extremes.

Many of our clients are small business owners. They are fascinating and passionate people to work with. They are willing to take the risks required to cultivate a business, and they devote their time and effort into doing what it takes to make it succeed. Their family and friendships grow out of running their business. They employ their children.

Interestingly, their sense of mission about their companies extends to combining corporate and charitable intent. According to a 2010 Ernst and Young study, Entrepreneurs and Philanthropy, nine of ten entrepreneurs extend their personal giving practices to the corporations they run. The motivations they cited as most important were to give back to their local communities and to incorporate their personal philosophy into their corporate culture. In addition to starting their own businesses, 43% have started their own charities.

Most entrepreneurs surveyed have a quiet or passive giving style. Although their involvement may be known, they prefer not to be overtly recognized. Most have made charitable giving an essential part of their personal financial planning. They are as intentional about the causes they champion as they are about their companies.

You might think entrepreneurs possess the perfect financial personality, but they do have their weaknesses. First, they have a tendency to overwork. Perhaps this is how the two portly gentlemen acquired their girth by sitting behind their desks too long. Nesters spend less money and more time at home; travelers spend more money enjoying diverse experiences. In this regard the philanthropy of entrepreneurs is a healthy diversification of their business interests to "making mankind their business."

The second weakness is a tendency to run out of liquid assets. Entrepreneurs often sink all of their treasure as well as their time in their work. They are also much more tolerant of risk and wild swings of fortune. When times in their businesses get tough, they need to have liquid assets to survive a negative cash flow. Having a diversified base of liquid investments and lines of credit established during the good years can mean the difference between survival and bankruptcy.

Most entrepreneurs have complex finances but don't have the time to handle all the moving parts. But with great complexity comes great opportunity. Fiduciary advisors are invaluable to an entrepreneurial family. They can free them from some of the details and allow them to focus on their core business. They can also be proactive in suggesting aspects of comprehensive wealth management where small changes can have an enormous impact.

Delegating and accepting advice is the other impediment to entrepreneurs working with a financial advisor. They are accustomed to being the smartest people in the room, and a traditional commission-based agent or broker has little of value to offer. They need an expert, a savvy and reliable advisor to whom they can delegate key aspects of their financial well-being. They need a fiduciary who sits on their side of the table and has a legal obligation to act in their best interests.

The National Association of Personal Financial Advisors is the best organization I know to find such an advisor in your area. Visit www.napfa.org to find a fiduciary advisor worth trusting.

December 21, 2010

Thrifty: Buying Items That Are on SaleCheap: Only Buying Items That Are on Sale

Thrifty: Tipping According to ServiceCheap: Never Tipping at All

Thrifty: Putting Money Aside for SavingsCheap: Saving Everything and Living on Nothing

Thrifty: Taking Advantage of a Good DealCheap: Taking Advantage

Thrifty: Cutting Out Internet and CableCheap: Stealing It from Your Neighbors

Here is where I net out on these:

We buy items on sale quite often (as you might imagine), but who could possibly buy ONLY items that are on sale? What if you need something and it's not on sale -- what do you do then? What about the cost in time and effort of hunting down everything so that it's on sale? The costs just seem too high to do this on every item you might purchase.

I'm actually growing in my tipping (I now frequently leave money for hotel housekeepers -- in addition to the "normal" people who everyone tips, like waitresses). I don't think I have to or am bound by any social pressure or norm to do so, but I have the money and I want to leave some of it behind as a small gift for people who likely aren't as well off.

You certainly don't want to have a full bank account and an empty life. I know it may seem like I don't spend much since I'm always talking about saving, saving, saving, but I do spend a decent amount of what I earn and enjoy the fruits of my labor. One glaring example: my new car.

It's sometimes a balance between taking advantage of a good deal and taking advantage. I was close to this on my car (if you can ever really take advantage of a car salesman) and have been a few other times. That's when my wife usually pulls me back from the brink. ;-) Here's an example of something I consider taking advantage -- if not outright stealing.

Cutting something out is one thing, stealing is completely another. The former is ok. The latter is never ok.

In their piece on end of year tax tips for the generous, Kiplinger gives an example why it's better to give appreciated securities (assuming you do not want to hold on to them any longer) rather than cash. Their thoughts:

When you give $1,000 in cash, you get to deduct $1,000, and that saves you $250 in the 25% bracket. (Any state-income-tax savings are gravy.) But let's say you have $1,000 worth of mutual fund shares that you bought more than a year ago for $500. If you sell the shares, you'll owe $75 in tax on the profit, even at the preferential 15% capital-gains rate. But if you donate the shares, the charity gets the full $1,000 (it doesn't have to pay tax on the profit when it sells), you avoid the $75 tax bill, and you still get to deduct the full grand. It's a win-win-win situation.

I used this strategy several years ago (before the market melt-down -- when I still had big gains on almost every fund) to consolidate funds/accounts. I knew I wanted to give a certain amount over the course of the year, so instead of taking it out of cash flow, I gave securities. After doing this for a few years, I had drastically decreased the number of investment accounts and funds I had to follow/track.

A word to the wise: giving this way can throw the charity for a loop since many aren’t used to receiving donations in this manner. I had to do some research (find the right person at the charity who knew how to receive the securities on their end) as well as fill out some specific paperwork from the mutual fund company to make these transactions work, but it was worth the effort.

Just wanted to give you a heads-up -- if you're thinking of giving this way, be sure to allow a few extra days to take the extra steps required. This is certainly not a strategy you can use at 11:59 pm on December 31st! ;-)

#1 Nice guys finish first.#2 Speak to the right person.#3 Be honest, but don't be shy.#4 "I can't afford it."#5 Cheaper by the dozen.#6 Watch for sales before and after you buy.#7 Show them the money.#8 Don't sell yourself short by naming a price.#9 Be careful about threatening.#10 "I'd like to cancel my service."#11 Never on a Monday.#12 If you're still shy about haggling for a better price...

Here's my take on these:

#1 You can be firm without being a jerk. Store managers and employees love to hold their ground against jerks, so consider what a tirade/rude behavior might be costing you.

#2 Of course. It does no good to talk to someone who can't lower your price.

#3 You MUST speak up for yourself or you'll get nowhere. And of course, be honest. Is your integrity worth saving an extra $20?

#4 These words work especially well in this economy.

#5 I agree with the book where it says to negotiate for the best price, THEN tell them you'd like to buy a few of the item if you got an additional quantity discount.

#6 If there was a sale before you bought, you should certainly be able to ask for that price. And if the sale is right after you bought, go back and ask for the difference. If they won't give it, then return the original item (always keep your receipts) and buy a new one at the sale price.

#7 I ALWAYS ask if there's a cash discount when making big purchases. If there is and it's more than 2%, I pay cash. If there isn't, I pay with my 2% cash back credit card.

#8 This can be a killer. My dad did this when buying his most recent truck. He named a price he thought was very low, and the salesperson accepted it. Whoops! Not low enough...

#9 If you say you'll "take your business elsewhere", be sure to do it in a way that doesn't encourage the store to hold firm on their prices (see #1 again.)

#10 The old stand-by for negotiating with cable providers...

#11 They say that the best deals are made late in the week and particularly on Fridays, before holidays, and before three-day weekends. Anyone else heard of these guidelines?

#12 They suggest taking "baby steps" by asking if the business gives a discount for AARP or AAA memberships (we get the AAA hotel discount all the time.) I'll add to that by listing these six times it's easy to ask for a discount.

Of course you have to trade off time and effort with the amount you save. For instance, taking advantage of #6 above isn't worth the back-and-forth (IMO) to save a few dollars (though it would be for $10 if the store was conveniently located.)

For those of you who would some additional tips on how to ask for a discount, here are some previous posts you mat want to check out:

December 20, 2010

1. Not Running the Numbers. Anybody over the age of, say, 40 should have at least a rough notion of how much money he or she will need for retirement.

2. Having Only One Plan. Even if you retire right on schedule, the economy, stock market, or any number of other forces beyond your control might disrupt your plans. So it's smart to have at least a Plan B and possibly a C, D, and so on down the alphabet.

3. Passing Up Opportunities to Save. Our own surveys have found that if there's one widely shared regret among retirees, it's not saving enough or starting early enough. None of us can go back in time and fix that, of course, but we can make sure that we aren't making the same mistake now.

4. Depending on Your Home Equity

5. Ignoring the Nonfinancial Stuff

Here's where I stand on these:

1. I came up with my retirement number several years ago -- and boy was it a big one! I probably need to re-look at it again just to be sure. (FYI, my number is in the $3 million in investable assets range.)

2. I don't really have multiple plans, but I have built in a margin of safety within my planning designed to protect myself. The factors I've used to do this include: setting my number without counting on a penny from Social Security, assuming a very reasonable rate of return on my investments (6%), and retirement at 65 (though I could work longer if I had to.) That said, I may be taking early semi-retirement well before 65 since it looks like I will be able to financially.

3. Told ya that time is the key to great investing. ;-) You must save as much as possible as soon as possible. Don't worry if you haven't done all you could do so far and if you've wasted years -- get started NOW!!!! As they say, the best time to plant a tree was 20 years ago. The next best time is today.

4. Though my home is paid off, I'm not counting on the equity to help fund retirement. That said, it's likely that we'll downsize at some point in time and that could free up some extra cash.

5. I haven't yet figured out what I'll do when I retire, but that's still far enough away that it's not a pressing matter.

Pay yourself first -- I actually pay myself second, but I agree with their overall point.

Automate -- I've done this for years. Paycheck is automatically deposited in my checking account. Most of it then goes to Vanguard and is automatically invested. Another portion is automatically sent to my 401k and invested automatically.

Make reality your perception -- I have a few people I trust in managing my finances -- namely my CPA (taxes), my lawyer (will), and my insurance agent (disability insurance.) I manage all other aspects of my finances myself.

Follow a simple and comprehensive strategy -- A simple plan and time is all you need to become wealthy.

They frequently don't take out student loans to finance their college education.

They will take out a mortgage to buy a home, but usually buy a more modest home than they could qualify for, stay in it a good long time, and pay off the mortgage early.

They don't take second mortgages, home equity loans, lines of credit, reverse mortgages, payday loans, etc. to pay for home remodeling, the kid's college, a summer cottage, retirement, a European vacation, etc.

Here's where I stand on these:

I borrowed to buy two cars -- one I had while in grad school and the first one I had out of school. Since then (over 20 years ago), I haven't had a car payment of any kind.

I never did run up credit card debt -- even when I was younger. Not sure why. I guess I always "knew" it was a bad move, but if you asked me about it then I'm not sure I could have verbalized why.

1. Thou shalt live like you’re going to die tomorrow, but invest like you’re going to live forever. In short, enjoy your life to the fullest every day – live like you’re going to die tomorrow. But since you’re probably not going to die tomorrow, plant part of your money in quality stocks, real estate or other investments; then hold onto them.

2. Thou shalt listen to thine own voice above all others. When you hear someone promising a simple solution to a complex problem, stop listening to them and start listening to your own inner voice.

3. Thou shalt covet bad economic times. Wealth is created when times are bad, unemployment is high, problems are massive, everybody’s freaking out, and there’s nothing but economic misery on the horizon.

4. Thou shalt not work. When it comes to work, you should try to do something that you regard as so fulfilling that you’d do it even if it didn’t pay anything.

5. Thou shalt not create debt. Paying interest is nothing more or less than giving someone else your money in exchange for using theirs. Rule of thumb: To have as much money as possible, avoid giving yours to other people.

6. Thou shalt be frugal – but not miserly. The key to accumulating more savings isn’t to spend less – it’s to spend less without sacrificing your quality of life.

7. Thou shalt not regard possessions in terms of money, but time. You go to the mall and spend $150 on clothes. But what you spent isn’t just $150. If you earn $150 a day, you just spent a day of your life.

8. Thou shalt consider opportunity cost. This is related to the commandment above. Opportunity cost is an accounting term that describes the cost of missing out on alternative uses for that money.

9. Thou shalt not put off till tomorrow what thou can save today. Fortunes are rarely made by investing big bucks, nor are they often made late in life. Wealth most often comes from starting small and early.

10. Thou shalt not covet thy neighbor’s stuff. Decide what really makes you happy, then spend – or not – accordingly. When your friends make an impressive addition to their collection of material possessions, be happy for them.

Here's my take on these:

1. Certainly there is a balance between living for today and saving for tomorrow. It's often difficult to achieve all the time and one goal most of us are working on regularly.

2. I get input from a variety of sources, but when it comes down to it, I listen to myself much more than I do others. This is sometimes good and sometimes bad, but for the most part it's worked out well.

3. There are many that believe that tough times like we're going through now set the stage for huge gains we'll reap later. I know that the finds I invested in during the lows of the recession are doing quite nicely now. It was tough putting that money into what seemed like a bottomless pit, but now I wish I had invested more.

4. I don't buy the "do what you love" line of thinking (I love sitting at home watching TV -- think I can make a fortune doing that?) No, I think "do what you like" is a better rule-of-thumb IMO.

5. I think you all know what I think of debt...

6. I like the way they put this: "The key to accumulating more savings isn’t to spend less – it’s to spend less without sacrificing your quality of life." That's a nice way of saying what I try to achieve.

7. I often calculate the time I need to work to buy something -- two hours for this, three days for that, etc. It helps me decide whether or not the purchase is worth it.

8. I think we are all considering opportunity costs on a regular basis. We know that if we buy X that we may not be able to afford Y.

December 18, 2010

The following is a guest post from Nick Drzayich, an advisor at Eagle Capital Management where unique and innovative financial strategies such as Becoming Your Own Bank are taught.

We all know that banks are some of the most powerful and lucrative institutions around, so it would make sense to mimic their business model. I'm not talking about going out and getting a bank charter, buying a piece of land, constructing a bank and then going out to find customers, that is way too much work! I'm talking about the bank being your source for money when it comes to big ticket items such as cars, boats, remodels, furniture and the list goes on and on. What if you could hop over the counter and become your own banker?

Let me take a minute to explain that understanding this concept will involve a paradigm shift for the typical person. We are simply "used to" relying on banks to help us purchase things we can't afford up front, like I said before you have to be able to play both roles, both the banker and the customer. If you can grasp this concept I can guarantee you will see the potential that lies in Becoming Your Own Bank.

The concept itself if rather simple, keep in mind that it will crumble to the ground if you aren't honest with yourself. Often I'm asked by those investigating the idea, "what's the risk?" My answer is always YOU. You are the only reason this concept will not work, if you don't have the discipline to pay yourself back just like you would a bank, the system is worthless. So let's get into an example to show why it makes so much sense to look into Becoming Your Own Bank:

Let's say you are going to buy a $40,000 truck for your business or personal use, normally you would say there are two ways I can purchase this truck, option 1 is to pay cash and option 2 is to finance (we'll leave out the lease option as it usually worse than financing in the long run). If you pay cash for the truck you say goodbye forever to the opportunity that $40,000 had to make you any additional money in the future. 5 years later you've got a truck that has depreciated by at least half it's value leaving you 20k in the hole (spent $40,000 and now own a truck worth $20,000).

If you decide to finance your balance sheet looks even worse after those 5 years. With a car loan at 8% you will have ended up paying $48,663 for the truck, subtract $20,000 from that for the value of the truck you now own and you're left with a negative balance of $28,663.

Here is where Becoming Your Own Bank presents a third option. Over time you save the capital needed to purchase the truck in your private banking system, when the time comes you borrow from your "bank" and pay for the entire truck ( just like you would if you paid cash), only this time instead of that being the end you treat yourself just like the bank would and pay yourself back plus interest. After 5 years not only do you have the $20,000 the truck is worth but you've got the $48,663 (principle + interest) in your pocket, putting your balance sheet at a positive $68,663.

It seems silly not to choose a positive $68,663 over a negative $28,663 or a negative $20,000.

Becoming Your Own Bank is not some "get rich quick" scheme, in fact it is a tool that uses one of the safest, most reliable vehicles available to help build wealth over time by doing what you would be doing anyway....buying things. Not to mention teaching it's users how to save until they are able to afford, something the majority of this country has forgotten how to do.

December 17, 2010

Shortly after Thanksgiving we received a sale flyer from Walmart in our newspaper. On the front page was an image of a Walmart receipt with the items blurred out. But on the bottom it said (in very large, clear lettering):

We help families save an average of $2,800 a year, no matter where they shop, based on Walmart's impact on the economy.

This made me think of a few things:

I'm assuming they mean that when Walmart moves into an area that other businesses have to lower their prices to compete, so even if you don't go to Walmart, you save money. Does this sound to you like whet they mean?

I wonder if it's true.

Is this a good thing to say in an ad or not? I understand that they mean to say "we're looking out for you to get you the best price" but don't they also imply "why shop at Walmart when you're saving by shopping other places?"

December 16, 2010

Lenders only take advantage of you if you let them. Read the agreement. If you don’t understand the agreement, find a realtor/attorney/banker/accountant who can, and pay her to explain it to you until you understand.

Or just read this.

Some lenders quote both an interest rate and an APR and/or APY (those stand for annual percentage rate and yield.) What’s the difference between either of them and a plain old interest rate? Plenty, considering that plain old interest rates rarely tell you the whole truth. Plenty, and enough to cost you if you don’t pay attention.

Say you find a lender who expects you to pay 6.1% annually, which is the going rate for a 3-year used car loan. (We’ll leave aside the wisdom of saving up to buy said vehicle and paying cash.) That means for every dollar you borrow, you’ll pay 6.1¢ in interest every year, right?

No. Not only does that figure not take compounding into account, but there’s more. Presenting a trick some lenders use to take advantage of those who can’t be bothered to read an agreement:

First, turn the annual rate into a monthly rate. Or a semi-annual rate. Or a semimonthly rate. Something less than a year. We’ll use monthly.

There are 12 months in a year (trust me, I went to college) so we take the 12th root of the rate. Using our example of 6.1%, that’s .495%.

Now, multiply by 12 to revert to an “annual rate”. You get 5.94%.

Hey, that’s less than 6.1%! Let’s go with it!

Some unscrupulous lenders would thus argue that you’re getting a 5.94% loan (AMAZING DEAL) as opposed to 6.1% (USURY OF THE HIGHEST ORDER). Either way, they’re lying by 16 basis points*.

Go semiannually rather than monthly, and a 6.1% rate transforms into a 6.01% rate using this method. This isn’t technically “lying”, but it is throwing a plump juicy orange into the middle of what’s otherwise an apple comparison.

When advertising an “interest rate” under this method, rather than an APR, the lender is playing fast and loose with the truth. Borrow $1000 at 6.1%, and yes, over the first year you’re paying $61. But there’s no set of circumstances under which you’d be paying $59.40 here, as many a lender would have you believe.

Is advertising 5.94% when the actual interest rate is 6.1% that big of a deal? Does it increase business? Well, from a sales and marketing perspective, every numeral counts. Don’t forget, it’s part of the human condition to be pennywise if not pound retarded. There are websites created to cater to that subgroup of morons who will drive across town to buy gas for $2.869 a gallon when there’s perfectly serviceable $2.889-a-gallon gas just down the street. Heck, it’s 2010 and people still buy cigarettes: is blinding them with some of the more esoteric points of high-school level math going to help them behave rationally?

So yes, a 5.94% rate will attract borrowers who’d otherwise be patronizing a different lender who’s offering 5.97% or 5.99%.

Alas, even that’s not good enough. APRs get classified further into nominal and effective. Nominal APRs are what we’ve been getting our heads around so far in this post. Given their name, effective APRs sound like they’d be the more important ones and therefore the ones you should pay attention to. But they aren’t. Effective APRs are supposed to include every contingency that your loan could encounter, and in theory, they sound like they’d be a fairer thing to quote than mere nominal APRs. But effective APRs don’t have a precise legal definition, so for instance, they can incorporate processing fees – which vary widely (and wildly) from lender to lender. If you look only at nominal APRs and nothing else from lender to lender, you won’t encounter this problem.

But that’s still not enough. Some extraordinarily deceptive lenders will use the ridiculous phrase “APR compounded monthly” or entertain some other adverb. Annual, compounded monthly? Read that again. Then, run away from any lender so gauche as to even mention such a thing. You want unqualified APR, and only unqualified APR, with no weasel phrases preceding nor succeeding it. Do so even if the lender offering you x% APR compounded monthly is giving you a better deal than another company whose APR is unambiguous. Do you really want to do business with someone who gets deceptive before your business relationship even gets started?

There’s no excuse for lenders trying to hoodwink you, but there’s even less for you to be hoodwinked. Consumer protection doesn’t start with a government agency, nor with an email to your local newspaper. It starts with you.

*A basis point is 1/100 of a percentage point. The term was created to make life simpler. Say you have two salesmen working for the same company: one earns 5% commission, the other 6%. (The latter salesman is the owner’s nephew.) How much higher is the second salesman’s commission rate? Is it 1% higher than the first salesman’s? Well, the number that’s 1% higher than 5% isn’t 6%; it’s 5.05%. Okay then; is the second salesman’s commission rate 20% higher than the first salesman’s? Maybe, but that might make people think that the nephew’s already generous commission rate is 25%. Rather than be endlessly confused while comparing percentages, better to say that the second salesman’s commission is 100 basis points higher than the first’s.

I've detailed many sports figures, movie and TV stars, and even "everyday" people who have made a ton of money and then spent and/or lost it all. In fact, it's almost become the norm to see someone famous with great wealth blow it over a few years.

Brandon Jennings of the Milwaukee Bucks, who earned about $2.2 million last year in his first NBA season, is the proud owner of a Ford Edge, which cost $26,000.

New York Knicks guard Roger Mason Jr. said he recently traded in his Bentley convertible for a used Cadillac Escalade.

And when he needed to work out and get therapy during the offseason, James Jones of the Miami Heat said he used the team's facilities instead of paying for a private trainer. "We've got a lockout coming," Mr. Jones said. "I'm not going to pay that much money to have somebody stretch me for an hour."

Brandan Wright of the Golden State Warriors, who was a first-round draft pick and will have earned $11 million before his 24th birthday, is typical of a new attitude. He said he owns one BMW and a home in Nashville, Tenn., for his immediate family. Mr. Wright said he likes to get "nice sandwiches" rather than lavish meals when he's eating out on the road in order to save cash. And if his spending ever gets out of hand, he said, he has trained his financial advisers to call him to tell him to rein it in. "Cheap is the best way to be," he said.

Mr. Jones of the Heat, who is the players union's secretary-treasurer, was a finance major when he was at the University of Miami. He said he tried to keep himself on a 20/80 budget when he joined the league in 2003—spending 20% of his salary, saving 80%. When he played for the Suns from 2005 to 2007, he rented an apartment in Phoenix while paying off a mortgage and taxes on a home he bought in Miami. If he came into the league now, he said, he would have only had one property at a time.

Ok, so there's a potential lockout coming, forcing these guys to prepare in advance for a tough time. Still, they are going against the flow and making financial moves that most people would not. James Jones is to especially be commended. He's been living on a 20/80 budget for seven years now. He has to be set financially for the rest of his life (assuming he can keep his spending under control that long.) Good for him!!!!

As I like to say, if you make $1,000,000 a year and spend $1,000,001 a year, you're going backwards financially. Unfortunately, that seems to be the norm these days for high-income athletes and movie stars. That's what makes the people above so impressive -- they are going counter-culture and making the right money moves -- and they deserve recognition from us all for doing so.

I have written quite a bit previously about freelancing on the side and how working on the side for your own clientele in the same field as your career can triple your effective hourly wage and get you more time off from work too.

If you are in a service related profession, such as an attorney, CPA, clinical psychologist, decorator, logistics planning and similar professions, freelancing is arguably the easiest and most turn-key approach to making more money on the side.

That said, many aspiring freelancers make it a lot tougher to get started than it actually is, and often end up overspending on non-value add expenditures (or garbage) way before their business ever gets a chance to get off the ground. Other psychological challenges faced are shortage of start-up capital and a dry pipeline of clients. Without making this an ultra long thesis paper on freelancing, I will briefly discuss two areas of focus that can help you as a freelancer. What qualifies me to do so? Although freelancing is not my main source of income, I have earned tens of thousands of dollars over the past few years taking up selected freelance projects, mainly within the capacity of conducting financial due diligence on business purchase deals, business and life coaching, search engine optimization and internet marketing strategy and implementation.

So without further delay, here are two areas of recommended focus for soon to be successful freelancers:

Line Up Your Ducks

It’s a common tendency for anyone starting a business for the first time to be ultra particular about getting all the start up details right. While some things are critical to take care of, others can be overlooked.

Business set up is one example. When first starting out, focus on acquiring your business before you incorporate your business entity. Investing the time and money to set up your business before you get any business will be a big waste of limited resources. Remember, one thing busy corporate professionals don’t have much off is time, so make sure to use your time wisely.

Most freelancers typically engage in projects tied to their professional skill-set. If you are in this boat, focus on getting commitments from clients. Your service offering should be something you already know and can speak about well enough, so it shouldn’t be any problem approaching potential clients with your skill-set.

One way to start spreading the word is by beginning with your inner circle. Tell your family, friends and social colleagues about what you are doing, and get referrals when possible. Set up your business formally only after getting a few commitments in your pipeline.

Some immediate business set-up tasks to consider are the following: get business cards published, launch a website or a blog, file papers for business entity incorporation (I recommend an LLC to start off), get your Employer Identification Number (EIN), open up a business bank account and start developing a relationship with an accountant you trust (preferably referred through word of mouth).

Remember, while it is good to pre-plan, you don’t have to be meticulous about every single thing, particularly when first starting out. Avoid the paralysis of analysis and just do it.

Hit the Trenches

The big business deals are made in the trenches, whether on the golf course, cocktail party or the football stadium. The point is to get out there and network. Sure you’ve told your family and friends, but as a freelancer, you can’t expect business to walk over to your doorsteps.

Get out of your comfort zone to network and meet people. Identify areas where you have the best chance of finding your ideal client and hang out in those areas. For example, if you are a search engine optimization (SEO) expert, you might want to attend web development seminars and mixers where web masters are likely looking to team up with folks who know SEO. Connect with local business organizations through the chamber of commerce in your area, or find a business network group to join.

If you are very good at what you do, and given some time and projects under your belt, your clientele will help you acquire more business through word of mouth referral. To improve your chances of benefiting from word of mouth referral, in addition to doing a bang on job, make it a point to periodically touch base with them.

It is important to stay in front of your clients so they don’t forget about you, even if it is via an occasional email greeting during holidays. Marketing and sales is all about frequency of exposure or point of contact. At the end of the day, we are all in the profession of marketing, whether we are pitching a promotion or a raise, or trying to sell a product or service.

Of course, don’t forget Facebook and Twitter, the two single biggest social networking platforms. If used appropriately, these alone can fetch you more business than you could handle. Incorporate both of these into your website or blog. If you have a website, consider attaching a blog to it where you can write more frequently about recent developments in your business and industry.

Concluding Thoughts

Personally, my network and recently my blog have been the most effective tools in bringing me high quality and highly paid freelance work. I do want to emphasize the fact that as a new business, you won’t be banking big bucks right away.

Developing any business takes time, patience and persistence over an extended period of time. It may take you weeks or months along with several rejections to get your name out there and secure a gig, but you will eventually if you keep chugging along.

It helps to have a full time job when starting out so that you are not desperate about acquiring freelance business. But with the right and consistent approach over time, you may grow your part time freelance business big enough where you could quit your job if you wanted to.

December 15, 2010

I'm in my mid 40's, and through +20 years of working crazy hours/travel, have managed to accumulate a little over $5M after tax. And the funny things is, nobody else knows it (I love the anonymity of the web).

I still dutifully show up to work every day, but as it's not that exciting of a job, I'm asking myself why? It's either just momentum or inertia or perhaps I just can't convince myself at the gut level that maybe $5M really is enough? Based on the above comments, it sounds like there are definitely some who would bail? If anybody has any first hand experience with this question, I'd love to hear about any advice you might have.

5. Consider hybrid products (life insurance policies or annuities that let you divert part or all of the benefit to long-term care expenses).

6. Cut the cost of a policy while still providing yourself with a reasonable safety net.

My thoughts on these:

I wish my employer did offer it, but I have no such luck. I'm guessing most companies don't either.

I was talking to a financial planner friend the other day and he said that insurance companies aren't allowed to raise the price of your policy, but they can raise the price of the policy class your policy happens to be in -- which basically gives them the ability of raising your price.

Of course you'll want to go with a company that's going to be around when you need the insurance -- just like when you buy any insurance product.

Still a lot of ins and outs for me to learn such as when is the best time to buy, what are the options I want/need and which ones I don’t need, how much coverage is suitable, etc.

1. They don't try and "keep up with the Joneses."2. Time is more important than money.3. It's not about getting the best price, it's about getting the best value for what you spend.4. Cheapskates don't like to shop (less time spent shopping equals less time spent buying.)5. They don't often have purchase regrets because they buy right in the first place.6. They look for purchases/items/investments that appreciate, not depreciate.7. Cheapskates know the differences between needs and wants.8. A cheapskate is a premeditated shopper.9. They place a greater value on "experiences" than "things."10. They do what they love for a living.11. They don't like to spend money.12. Cheapskates are brand blind and advertising adverse.13. They understand the difference between change and progress (they don't need a new item unless it delivers more value/does something new/better than an old one.)14. They hate debt.15. They are self-reliant and self-sufficient.16. They believe in a higher authority (not always religious in nature -- though most were.)

A few thoughts:

If looked at in an extreme context, these could be taken as very negative attributes. The book is careful to note that these actions/thoughts are not taken to the limit to where they eliminate all fun/joy in life. In fact, quite the opposite. Most of these people can enjoy what they want to do because they manage their money well and can afford to participate in activities they like.

I would have guessed at many of these, but some are real shockers. For instance, #10, #13, and #16 are ones I would not have listed myself if asked to come up with a list of frugal mindsets.

#13 struck me as almost being a political comment. ;-) We've all been inundated so much with "change" from politicians over the past three years that it's almost hard for me to think of it in any other context. Interesting to see the delineation between "change" and "progress" though. I assume that "change" means "better" (or "progress") in this case, but these people don't see this as being so. Example, a new phone might offer a change versus and old one, but the basic performance is the same, so why is there a need to buy the new one?

#16 could be a topic for a Sunday post here. I don't see much else in the book related to this though, so there's not much to comment on.

December 14, 2010

I am in a hot pickle, but I am trying to figure out how to get out of it and get started on the right road. I am 42, and I have an 18 year old daughter. I am a single mother and have been since she was 4 months old when her dad hit the road without so much as a fare-thee-well. The rare child support check that showed up was usually in the amount of $17.38. I did get three that were under a dollar. Needless to say, he has not been and will not be any help in taking care of expenses for my daughter's schooling or future, so we are taking the humble route with community college, etc. I am advising her about having savings starting now and making plans for the future -- things that nobody told me about.

Because I didn't get off to an informed start, I have myself backwards and upside down to this day.

I put myself through college while my daughter was growing up, as I had not completed a degree program at the time of her birth. That put me in the hole financially, as I racked up $40,000 in student loans. I still have most of that to pay, as I have deferred payments while trying to survive our daily lives. I acquired a teaching credential, but the last decade has been rotten for the teaching market, so I have no secure contract. I have done a number of temporary contracts, substituting, part-time work, and all of that is for the same school district, so what I HAVE managed to put into retirement all goes to the same place--the state public employees retirement system. Currently, that investment holds little more than $10,000.

At 42 years of age, my picture looks bleak, but I am determined to turn it around--though I am not yet sure just how.

With the student loan debt, no savings or IRAs or investment accounts etc, and no assets besides a paid off 2005 car, I am don't have much going on. I have opted for a retirement plan that pays into social security as well as the state pension, so I pay a bit more out of my paychecks (many teacher retirement plans don't pay any social security) but, while I am not counting on social security, I don't want to have all my eggs in one basket. In any event, it is difficult to save for tomorrow when you are just trying to survive this day. I was laid off last June (2010) and have only part-time work right now. My income dropped from over $3000 per month to less than $700 a month. That really doesn't leave me much to work with right now.

You were considered to be doing well financially if you were "earning your age." In other words, if you were earning $30,000 by the time you were 30-years-old then you were making good money.

Yep, I think we all can see how this is out of date today. ;-)

Since I got out of graduate school, I have always earned more than my age -- usually multiples of my age (two times, three times, etc.) After all, you'd expect me to be making the most of my most valuable financial asset, wouldn't you? I'm sure many of you are the same.

The author suggests taking this old rule and revamping it to "spending your age" (or less.) In this scenario, if you were 30-years-old you'd spend $30,000 a year or less.

Yes, it's that time of year again -- Free Money Finance March Money Madness is upon us!

For those of you who don't know what I'm talking about, it's our annual "tournament" of the best personal finance articles of the past year. They face each other in an NCAA-style bracket system, FMF readers vote for the winner, and at the end of it all, the best post is left standing. And like last year, it's all for several good causes. Here are some details from last year:

This year I'm getting a head start on it. In the past, we've had so many posts in the early rounds that it's been hard for readers to keep up. So this year I'll be starting the tournament early (still ending near the end of March) and letting everyone have plenty of time to read all the posts.

64 posts in total will be allowed in the 2010 competition. Each one will be assigned randomly in a bracket set of "games" similar to the one used for the Men's NCAA basketball tournament. (If you want to see what one looks like, go here to download last year's bracket.) Here are more details:

1. The name of the post you're submitting (must be from the calendar year 2010)

2. The URL of the post you're submitting

3. Two to five sentences on what makes this post so great (I'll be using this wording in the competition, though I reserve the right to edit it, so really "sell" your posts).

4. The charity you're playing for (see below.)

NOTE: IF ANY OF THESE (INCLUDING THE CHARITY) ARE MISSING, YOUR ENTRY WILL NOT BE CONSIDERED. AND I WILL NOT GET BACK TO YOU TO REMIND YOU THAT YOU SUBMITTED INCORRECTLY.

Entries are on a first-come, first-served basis and all spots usually fill up in a few days. So if you wait, it's possible you're not going to get a spot.

Submission Details

You can submit one post per site. If you have more than one blog, you can submit posts for each blog, though your second blog's submissions won't be considered until all the first-time submissions have been considered from other blogs.

In the past, there were 64 slots open at the start. This year, there are only 54. As noted earlier in the year, the ten best winning posts for the year (as judged by me) from the Best of Money Carnival will receive automatic bids. These entries will NOT count as a blog's official entry and if a blogger wants to submit an additional post for March Money Madness he can without penalty and with the same consideration (first come, first served) that other entrants receive. I'll be naming these winners as part of the seeding process.

FYI, if you have a Best of Money Carnival winning post and don't know if it will make my 10 and yet you might want to submit it anyway, I suggest you simply send me the top four posts you'd like to have included in March Money Madness (in the order you'd like them to be considered.) This way, if one of your posts gets an auto Best of Money Carnival bid, I'll just move on to the next one on your list for consideration. Some blogs have more than one Best of Money Carnival winner, hence you should submit four posts if you want to be safe and get as many considered as possible.

How Posts Compete

The posts will "play" each other with the winner advancing and the loser being bumped. They'll "play" in this manner:

1. I'll post the competing posts, listing who's playing who

2. Readers can leave comments on which they like better

3. The post with the most votes wins -- I'll break any ties

4. The winner will advance in the bracket to "play" again. Ultimately, there will be only one post left -- the "champion" for this season.

Criteria for great articles are as follows:

1. Practicality of the post

2. How interesting/provocative/unique it is

3. The "personal-ness" of it

4. Its impact on net worth.

What the Winners Receive

Like last year, I'll make contributions to the charities of the top four winners' choices as follows:

First Place donation -- $500

Second Place donation -- $300

Third Place donation -- $100

Fourth Place donation -- $100

The charity has to be a registered charity to receive a tax deduction under U.S. law. In other words, I won't be giving $500 to a "charity" you and your brother came up with on the spur of the moment. In addition I reserve the right to ask you to select an alternative charity in case I don't feel it's appropriate for me to give to the cause you've listed. This hasn't been a problem in past years and I don't expect it to be this year, but I'm putting this stipulation in up front just in case I need a bit of flexibility.

Why Readers Should Care

As readers, you get the chance to read some great pieces and help decide who wins this year's championship. It should be great fun and full of the best personal finance posts of the past year. Good stuff all the way around!

The more and more I think and learn about personal finances the more I think that becoming wealthy really just comes down to one vital step: making sure the gap is as big as possible.

The gap is simply the difference between what you make and what you spend. The larger it is, the more money you have to do all the things needed to build and protect wealth -- pay off debt, invest, buy insurance, etc. And the larger it is, the sooner you can meet your financial goals.

And of course the steps to growing your gap are well-known, fully documented, and often discussed: grow your income and keep your spending under control. Seems simple huh? And yet most of the people in our country have a difficult time making their gap all they want it to be.

Lately it's just struck me how we (mostly me, I run a finance blog after all) endlessly discuss retirement strategies, tax moves, investment philosophies, and on and on. And of course, these things are important and give us ideas for making the most of our money once we have it. But the foundation to it all, the key to success for everything financial, the step #1 in any plan to become wealthy is, and always will be, developing and growing the gap.

December 13, 2010

My son is a high school senior and I'm not sure and worried about what we'll have to pay for college.

I am disabled and my wife has only a moderate paying job. Our total adjusted income is about $58,000. We have no savings and don't own our own home.

My son is an excellent student with a 4.379 GPA (4.0 scale), a 28 ACT, is an excellent athlete (but probably D3 level), and has been involved in many extra-curricular activities (NHS, KeyClub, Debate, etc.). He has also captained both his baseball and football teams. He would like to pursue a career in sports medicine.

Any advice on how we should balance school choice and finances would be greatly appreciated. We just don't have a lot to contribute!

Myth #3: When asked where you see yourself in five years, you should show tremendous ambition.

Myth #2: If the company invites you to an interview, that means the job is still open.

Myth #1: The most qualified person gets the job.

Here's my take on these:

#10 - I've interviewed hundreds of candidates in my career and I didn't prepare for most of those interviews. The article is right -- I was usually over-worked and busy and simply didn’t have much time to prepare. The exception: when someone was to be hired in my department or working for me directly. Then I prepared well in advance.

#9 - I have never had and never seen offered any sort of "how to interview" training.

#8 - I agree -- refuse the drink unless it's right there or you really need to get hydrated.

#7 - The only time I've ever been asked for references' contact information was days after an interview. I've never been asked to provide them immediately, though I guess it wouldn't hurt to be prepared (it shows you can anticipate questions).

#6 - I wouldn't say that there's a right answer to every question, but I would say that there's a general way to answer most questions. It is to weave your accomplishments (along with facts, statistics, quantifiable results, etc.) into as many answers as possible, demonstrating to the interviewer that you are the sort of person who makes great things happen.

#5 - You need to balance between brevity/conciseness and accomplishing the tasks I noted above in #6, so I'd say you need "medium-length" answers. In reality, the interview should flow like a conversation -- with you doing most, but not all, of the talking.

#4 - Looks always matter. You need to be well-groomed, dressed appropriately, and look as attractive, energetic, etc. as possible. IN other words, look like someone that somebody else would like to hire.

#3 - I always answer that I want to continue growing and contributing to the company throughout my career. So I would see myself in a position commensurate with my performance for the organization which, based on my past experiences (insert an example or two here), would mean more responsibility/ability to influence positive outcomes for the company.

#2 - Generally this is true -- it's not a myth in most cases. IMO, it's especially true if the company flies you in for an interview and/or somehow spends a decent amount of money to have you talk with them.

#1 - Obviously, someone has to be qualified for the job to get it (unless an interviewer thinks he can "grow" into it.) But once that criteria is met, a whole host of other factors enter in: who has the best "fit" with the company, who the hiring manager likes best/thinks will work best with his team, who can be secured for the lowest total compensation, who can make the move quickly (most companies hiring need someone NOW), and so on. So it's not as simple as being the "most qualified."

After detailing college graduates with $97,000 and $120,000 in debt, I thought I had reached the peak of "bad ways to finance college." I was so, so wrong.

Here's the story of a young lady who has $200k in college debt (from an undergraduate degree alone.) Yikes! Her words:

The severity of my situation goes a bit deeper than "I owe this money, help me" - I am actually forced to live with my parents (forced = I am lucky! But...) as the monthly payments for just my private loans are currently $891 until Nov 2011 when they increase to $1600 per month for the following 20 years... attached is my payment plan. I also mentioned I have a job - which is great! And I probably have my college education to thank for that! Except there is still no way to make these monthly payments, and live on my own as a contributing member of society. Neither of my parents, nor I, really knew how this would pan out — unfortunately — and now that I'm here, I see no real light at the end of the tunnel.

Ugh! Here's another person who simply didn't think through the college/education/debt/earning issues in advance -- and now she's paying for it.

But she's got another great idea! She's set up a website so people can donate and help her pay off her debt. Yeah, that's gonna be money well spent.

As for the student above, I can't muster much sympathy. I suggest she puts her nose to the grindstone, makes as much as she can, saves as much as she can, and pays off as much of the loan as soon as possible. Yes, it will take her several years to do so, but if she works at it, she may just end up making lemonade out of lemons. I imagine hearing of her in ten years -- she'll have a best-selling book, a well-read blog, and be all over speaking to people on how she paid off $200k in college loans in five years. Here's hoping! ;-)

December 12, 2010

Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations. Proverbs 27:23-24 (NIV)

Here's what these say to me:

Be sure you keep a good handle on your money -- what's coming in and what's going out.

If you do not, your wealth/money will disappear (and I'll add -- and you won't know why).

So what's the solution here to make sure we get a handle on our money? IMO it's a budget ("spending plan" if you like) or some other method for tracking/managing your money.

Early on in our marriage, we had an annual budget that I updated monthly because we needed to keep a tight rein on our money and ourselves. As time went on, we still had an annual budget, but I only updated/reviewed it quarterly. Years later it was an annual budget reviewed annually. For the past five years or so we haven't had an "official" budget, but we do track our finances with Quicken. It's an easy way to make sure we know where our money is coming from and where it's going.

Notice the progression over time -- as we got to be better money managers, we didn't need as much budgetary control. But we still have some. After all, we want to be sure to "know the condition of our flocks" and "give careful attention to our herds" because we know that if we don't our "riches will not endure forever" and our "crowns will not be secure for all generations." ;-)